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KPMG survey: Top concerns for chemicals executives

As 2013 began, the US Congress and the Obama Administration enacted an agreement that addressed elements of the so-called “fiscal cliff” – specifically, as examples, revising income tax rates and delaying immediate Federal spending sequestration under the Budget Control Act of 2011. However, serious problems remain for the world’s economy. A recent KPMG survey of 100 global chemicals executives reveals major economic concerns as well as key strategies that companies are adopting for 2013.

As you look at the macro-economic environment today, what is the biggest concern for you and your business?

Source: KPMG International, 2013

Which of the following is the most important part of your business strategy right now?

Source: KPMG International, 2013

Which of the following is the most important part of your business strategy right now?

Source: KPMG International, 2013

Where will be the primary focus of your emerging market growth strategy over the next three years?

Source: KPMG International, 2013

What do you see as the biggest constraints to M&A activity in the chemical industry today?

Source: KPMG International, 2013

Chemicals executives preparing for an uncertain global economy in 2013, according to KPMG survey

As 2013 began, the US Congress and the Obama Administration enacted an agreement that addressed elements of the so-called “fiscal cliff” – specifically, as examples, revising income tax rates and delaying immediate Federal spending sequestration under the Budget Control Act of 2011. However, serious problems remain for the world’s economy. A recent KPMG survey of 100 global chemicals executives reveals major economic concerns as well as key strategies that companies are adopting for 2013.

In October, when the KPMG survey was conducted, 41 percent of chemical industry business leaders indicated that their biggest business concern was the US fiscal cliff.

This result highlights the concern and susceptibility of chemicals companies to outside ‘economic shocks’ with the US fiscal cliff being the first of many economic ‘showdowns’ to come in 2013. For example financial observers are closely following numerous events in the US, including the near- and long-term future of sequestration, the balance of Federal spending in FY2013 once the current continuing resolution expires in March, and another US debt ceiling vote either in spring or summer of this year.

Looking at other concerns, a fifth of respondents pointed to a potential slowdown in emerging markets, while the Eurozone debt crisis was cited by 19 percent of respondents as another key issue.

Respondents cited operational excellence and financial strength as their chief response to current economic and market issues, reinforcing long-term core competencies within the chemical industry. Portfolio management, innovation and R&D were chosen by only about a tenth of executives, suggesting that the sector overall remains focused on business fundamentals.

Nearly one-third (29 percent) of executives surveyed believed shale gas developments in the US will drive significant growth in petrochemical and downstream manufacturing as the industry can increasingly take advantage of well-priced and reliable US based feedstock. Additionally, 37 percent say US shale exports will force increased competition leading to price and margin erosion in Asia.

A significantly smaller group of respondents indicated that US shale gas would lead to a return of cyclicality to the US petrochemical industry (with sharp swings in supply and demand) or a negative impact to the petrochemical industry in Europe.

When asked about emerging market strategies, China, not surprisingly, was the clear favorite (21 percent) when respondents were asked to identify a specific country. A slightly larger group (30 percent) reported that their company was taking a portfolio approach that includes markets in China, India, other countries in Southeast Asia, Brazil, and the Middle East.

A significant number of companies represented in the survey apparently have not developed or finalized any emerging market growth strategies. In fact, 28 percent of respondents said that their companies had no strategy in place.

“We found that response surprising,” said Paul Harnick, chief operating officer of KPMG’s Global Chemicals and Performance Technologies practice. “We see emerging markets as a critical growth factor for any large chemical company over the next decade, and demand in those regions will only increase.”

While many executives in the industry are actively focusing on portfolio management, the level of M&A activity in the industry does not match the level of discussion. As in other areas discussed above, macro-economic uncertainty was the key factor in discouraging M&A by chemicals companies. Almost half (47 percent) of the respondents cited the economy as the main reason not to move on new deals.

The fact that 25 percent of respondents named availability of finance as another reason suggests that credit markets, although not completely frozen as they were in the first years of the global downturn, are still cool to the prospect of lending to companies.

The valuation gap between bid and ask prices may have closed with only 13 percent of respondents citing unrealistic valuations as a limiting factor.

Guarded optimism for the future

The economic news is not all discouraging. In December of 2012, the American Chemistry Council (ACC) reported that their Chemical Activity Barometer (CAB) had grown 2.8 percent from last year and had reached its highest level since August 20081. According to Kevin Swift, chief economist at ACC, the CAB reading suggests steady but slow growth for early 2013. A stronger gain of 2.3 percent is expected in 20142.

However, the general consensus among analysts as well as with the executives surveyed by KPMG is that macro-economic uncertainty will most likely continue to erode confidence and hinder growth in the global chemicals sector. Successful companies will focus on the fundamentals of operational excellence and financial strength, taking advantage of new access to US shale gas and emerging market growth in 2013 and beyond.

As Mike Shannon, global chairman of KPMG’s Chemicals and Performance Technologies practice, explains, “Companies that are successful in these endeavors can gain a competitive advantage and be better positioned to capitalize if the economic tide turns.”

1CEOs complain that deal does not solve debt problem, Reuters, January 2, 2013